The oral summary of Bankruptcy Judge Steven Rhodes’s opinion lasted roughly ninety minutes, and the forthcoming written opinion is rumored to be over one hundred and forty pages in length. In making his decision the Detroit bankruptcy judge green-lighted the City’s hopeful recovery through Chapter 9 bankruptcy.

The court noted that “this once-proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start.” That Judge Rhodes allowed Detroit to continue under the protection of Chapter 9 is not overly surprising to anyone who has closely followed the case. In fact the major unions and creditors opposed to the continuation of the bankruptcy proceeding had already threatened to directly appeal the decision to the Sixth Circuit Court of Appeals, far in advance of the ruling.

What is surprising to many is Judge Rhodes’ holding that he would entertain pension cuts to finance Detroit’s “Plan of Adjustment,” the City’s proposal to restructure its debt and reshape government operations, through which it hopes to emerge from Chapter 9. Still, he emphasized that he would not agree to pension cuts in the City’s final Plan unless the entire Plan was fair and equitable.

As we explained in our prior post on Detroit’s bankruptcy filing, the court was faced with four main considerations to allow the bankruptcy to proceed. First, the court found that Michigan Governor Rick Snyder legally gave the city permission to file for bankruptcy in July. Second, the court found “that the city was generally not paying its debts as they became due. The court finds that the city of Detroit was and is insolvent.” The third and fourth elements concerning good faith were a bit less black and white.

Regarding whether the City negotiated in good faith, the court held that allowing only a month to negotiate was not enough, and the City did not request counter-proposals. Thus, the City’s creditors “cannot be faulted for failing to offer counter proposals when they did not have enough information to evaluate the city’s initial vague proposal.” Even though the court ruled that Detroit did not negotiate in good faith, they nevertheless filed the petition for bankruptcy in good faith. Importantly, Judge Rhodes found that the distance between both sides made it impractical to negotiate in good faith.

The court has set a deadline of March 2014 for the City to file its first Plan of Adjustment. To give a potential time frame on the resolution of the Detroit case, on the same day that Judge Rhodes handed down his opinion, Jefferson County Alabama, which had been the largest municipality to file for Chapter 9 relief before Detroit, declared an end to its $4.2 billion case filed in November 2011.

As the proceedings move forward, we will keep you updated on what may prove to be the most influential Chapter 9 proceeding in history.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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